A Closer Look at the HUI vs. SPX

Let's dial in the ratio of the HUI Gold Bugs index vs. the S&P 500 that we have been reviewing from a monthly 'big picture' perspective. This weekly chart is also a big picture, but it adds the 250 week moving average and weekly MACD, along with its slower brother, TRIX, for more definition.

People should realize that while there is significant reason for fundamental optimism about quality companies within the gold stock sector this is, on a pound for pound basis, one of the most aggressively hyped stock sectors on the planet. The same can be said for gold itself.

Why is this? I believe it stems from a core and righteous belief by many gold bugs that things are not right with the system (thanks Captain Obvious :-)), gold should be money again (or at least it should anchor the paper of the modern realm) and it is simply a matter of time before destiny is achieved.

Gold, while in a predictable phase of under performance due to the Euro relief and US earnings and temporary 'jobs' pumps, has been beaten back from its impulsive highs during the acute phase of the Euro crisis. Hype took gold up, and hype is taking it down or more accurately, is causing it to under perform what is now being hyped; namely the salvation of the system as we know it and the ever present tout of conventional stocks.

Ah, but we saw this relief coming did we not? It was gauged as a necessary sentiment adjustment/volatility flattener and labeled the "October Bull Pivot", which marked a top in unreasonable levels of fear and anxiety and a bottom in the broad markets. Sentiment now rests squarely on the opposite pole, and risk vs. reward is simply terrible for conventional stocks for the short to intermediate term at least.

The HUI-SPX ratio now rests at a point that implies the risk vs. reward proposition is now on the side of the gold sector, at least in its relationship to the broad US stock market. The ratio now rests at a visual lateral support level, is near a supportive moving average and is sufficiently over sold by MACD to a level that can (not will, but certainly can) mark a bottom. TRIX is getting down to a range that has proven supportive during the 11 year rise.

Yet the weekly AROON trend is down (along with the daily, while monthly 'big pic' remains positive) and the STO has not yet formed a positive divergence or gotten solidly above 20. So the ratio remains in an intermediate chop and grind for now and there is always a chance that Goldilocks skips along with her basket of stocks right on through election season. But Risk vs. Reward is… anyone? Bueller? Yes, it is aligned against broad stock bulls right now.

Risk vs. reward players should be all over the gold stock case right now, at least in a watching and waiting mode. As I often find myself writing, perceptions are being cemented and the herd is being tended to the wrong end of the risk vs. reward ratio once again. Last summer, it was into the precious metals. Today, it is out of them and into the broad stock market. Heck, just follow Warren and it'll be okay!

This post goes up – and may be distributed elsewhere – as a way to once again portray the quiet stuff that goes on beneath the surface as the cycles play out. People dumping the gold sector now are likely to be about as successful as those that dumped it into the first yellow shaded area shown on the chart and those that dumped broad stocks and bought gold and gold stocks last summer (second yellow shaded area).